Performance/price risk

Toll Road Toll Road

Description (What is the Risk)

The risk that the asset is able to achieve the performance specification metrics and the price or cost of doing so.
Damage pollution accidents.
Meeting handback requirements.
Vandalism.
Equipment becoming prematurely obsolete.
Expansion.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner bears the risk of meeting the performance specification.

However, the Contracting Authority is responsible for enforcing the regime and for ensuring that the performance specifications are properly tailored to what the Private Partner can deliver. Consideration needs to be given to the ability of the Private Partner to achieve the necessary performance levels, and the appropriateness of metrics given the nature of the project.

In an availability based payment structure the Private Partner may be subject to abatement if performance based standards are not met. These standards may be linked to traffic flow KPIs or accident response measures (for example).

Mitigation Measures (What can be done to minimize the risk)

The onus falls upon the Contracting Authority to draft attainable standards based on relevant market data and policy objectives. Performance based on availability, and quality of operation and maintenance service can be measured against pre-determined schedules or standards and secured by respective penalties and deductions.

Risk profiles recognize the decreased need for mitigation as the project matures, but early stage mitigation measures are necessary in order to stabilize early losses.

The Private Partner will mitigate risks by appropriately allocating such risks to appropriate subcontractors.

Government Support Arrangements (What other government measures may be needed to be taken)

Where certain performance indicators cannot be met due to actions by the Contracting Authority or unforeseen circumstances, the Private Partner may be eligible to seek relief or compensation.

Comparison with Emerging Market

In developed markets, the Contracting Authority should have access to various data sources to develop realistic and attainable performance specifications and models.

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Description (What is the Risk)

The risk that the asset is able to achieve the performance specification metrics and the price or cost of doing so.
Damage pollution accidents.
Meeting handback requirements.
Vandalism.
Equipment becoming prematurely obsolete.
Expansion.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner bears the risk of meeting the performance specification.

The Contracting Authority bears the risk of enforcing the regime and for ensuring that the performance specification is properly tailored to what the Private Partner can deliver.

Consideration needs to be given to the ability of the Private Partner to achieve the necessary performance levels given the nature of the project and the emerging market in which it will be based.

Mitigation Measures (What can be done to minimize the risk)

The Private Partner may require the Contracting Authority to reduce the performance requirements during the settling in period and possibly readjust the performance metrics once the performance of the toll road has stabilized. This would mitigate the risk of long-term performance failure.

The Private Partner will mitigate risks by appropriately allocating such risks to appropriate subcontractors.

Government Support Arrangements (What other government measures may be needed to be taken)

Where certain performance indicators cannot be met due to actions by the Contracting Authority or unforeseen circumstances, the Private Partner may be eligible to seek relief or compensation.

Comparison with Developed Market

For emerging markets, particularly in the case of market first projects, the preparation of attainable standards by the Contracting Authority is complicated by the lack of relevant market data.

There is sometimes a risk that Contracting Authorities take a 'best in class' approach and set standards for higher than may be achievable especially if driving and vehicle maintenance standards fall below the aspirational standards.

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